Disclaimer: All information provided at Get Rich Slowly is for informational
purposes only. Rates & offers from advertisers shown on this website change
frequently, sometimes without notice. Visit referenced sites for current
information. Per FTC guidelines, this website may be compensated by companies
mentioned through advertising, affiliate programs or otherwise.

We want to talk to you if:

Personal Finance Tip:View investing
as trade-offs. In general, higher-returning investments
fluctuate more, while more stable investments offer lower long-term
returns. When constructing a portfolio, use a mix of investments
that represents the right trade-off between these conflicting
attributes.

In Praise of the Debt Snowball

During my twenties, I accumulated nearly $25,000 in consumer debt. I had a spending problem. With time, I was able to get my spending under control (mostly), but I still owned overwhelming debt. How could I get rid of it?

The personal finance books all suggested the same approach:

Order your debts from highest interest rate to lowest interest rate.

Designate a certain amount of money to pay toward debts each month.

Pay the minimum payment on all debts except the one with the highest interest rate.

Throw every other penny at the debt with the highest interest rate.

When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-highest interest rate.

This made perfect sense. By doing this, I would be paying the minimum amount in interest over the long term. The trouble was, my highest-interest rate debt was also my debt with the biggest balance (a fully-maxed $12,000 credit card at 19.8% interest). I’d plug away at this debt for several months at a time, but then give up because it felt like I was never getting anywhere.

This happened over and over. I’d start and fail. Start and fail.

Then I read about the Debt Snowball method in Dave Ramsey’s The Total Money Makeover. The Debt Snowball method is similar to the traditional approach except that instead of attacking high-interest rate debts first, you attack low-balance debts first. Why? Because you’ll get the psychological lift of pinging debts off in rapid succession. And if you’re like me, this makes all the difference. The Debt Snowball approach is:

Order your debts from lowest balance to highest balance.

Designate a certain amount of money to pay toward debts each month.

Pay the minimum payment on all debts except the one with the lowest balance.

Throw every other penny at the debt with the lowest balance.

When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

When I read about the Debt Snowball method, I was skeptical. I knew it would cost me more in the long run, at least on paper. But I figured I had nothing to lose. I tried it. In four months I’d paid off most of my debts. I was shocked. I’d been trying and failing for years, and now I was able to make a huge dent in just months? It was all because I had changed my approach just slightly.

Humans are complex psychological creatures. They’re not adding machines. Many of us know what we ought to do but find it difficult to actually make the best choices. If we were adding machines, we wouldn’t accumulate $20,000 in consumer debt in the first place! It’s misguided to tell somebody so deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing to do is to set up a system of positive reinforcement, and that’s exactly what the Debt Snowball method does.

Which method should you choose? Do what works for you. The first method can save you money in the long-run. But if you’ve tried it and failed, give the Debt Snowball method a shot. It might be the answer you’re searching for!

I’m curious if the authors of either strategy advocate any steps to decrease interest payments. It may be possible to transfer balances from high interest sources to lower ones or to negotiate the rates to something more reasonable. Paying down debt is laudable but one can (and should) do more to minimize interest payments.

I see this as very much a rationality versus practicality thing — rationally you would have been better off attacking your big high-rate debt first, but practically a plan’s only good if you stick to it.

I wonder if there are any tricks to play to make the highest-rate-first plan more psychologically attractive? Maybe comparing the amount of *interest* you pay each month would provide some reinforcement?

(I suspect probably not though: if you’re the type that’s buoyed by a gradually-reducing figure, you’re probably also the type that’ll choose and stick with the highest-rate first plan. If you’re not, it’s hard to argue with the snowball’s “wow, last month I had 5 creditors and now I have only 4″ payoffs.)

The greatest single revelation I received from taking Ramsey’s Financial Peace University was that money was primarily an emotional issue, rather than a mathematical one.

If we were robots, the high interest first rule would work like a charm. But since we’re human, we need to see reward for good behavior. I needed to learn this before I could make any concrete progress on paying off my debts.

I’ve always applied a formula to paying off my debt. I take a look at my balance and the interest rate. From there, I try to figure out which one will cost me the most over the life of the loan. Take the following as an example. (I realize it is not even close to being the right formula, but I am in a hurry right now )

In this example, I would pay the $5,000 loan first, because it would cost me the most in interest over time. This is just my personal preference and may not work for anyone else. Use whatever method works best for you… the important thing is you work towards being debt-free.

I find it interesting (psychologically) that you saw paying off all of a $2000 loan to be more “progress” or “reward” than paying off $2000 dollars of a larger loan.

I would track not by the number of loans or even the amount owed, but the total interest your debt is accumulating each month. You can watch this number drop faster when you pay off higher-interest loans first. This way you see more progress (and get bigger mental “rewards”) by following the most rational strategy.

Money is a mental thing. I realized that this past month, in a money crunch; my immediate reaction was to stop buying anything, including food, and stop eating what I had.
Really stupid reaction. But it’s what came out of my brain. So I can see why the satisfaction of paying off debts this way beats the money of paying them off some other way. You’re paying extra to be debt-free, or paying extra to do a little dance every few weeks when one falls down. And probably still eating.

[...] I’ve been reading about the debt snowball method of debt reduction. Conventional fiscal wisdom says that the smartest plan of action is to pay off the debt with the highest interest rate first. From a fiscal standpoint, that’s probably the wisest choice, because you pay the least amount of interest this way. However, humans are flighty creatures, prone to frustration and despair. If you are like me and have multiple individual debts (seven separate student loans!), and if your loan with the highest interest rate also has one of the highest balances, then it will take a long time to get that loan paid off. [...]

[...] I asked Oscar what he thought. He is a half-full person — he felt it was worth it. I sat and stewed for several minutes. Could we do it? I’d already set up an elaborate plan for paying off our debts using the snowball method, so I knew we could put a few hundred dollars more into the payments each month. I knew we could pay off the mortgage in 15 years. But I didn’t like having to be locked into it. [...]

[...] One key to successful money management is to make the most of psychological tricks. This is why the Debt Snowball is so successful. It’s also why a simple way to save is to simply avoid temptation — to avoid stores where you know you’re likely to spend. [...]

[...] The second link is to Get Rich Slowly, written by J.D. Roth. While less entrepreneurially focused than Ramit’s blog, J.D. spends his time offering practical tips for day to day money management to help you, quite literally, get rich slowly. From daily applicacable topics like Track Every Penny You Spend and “Investment Fun Money”, to more general life strategies like the Debt Snowball and How to Aquire a Good Entry Level Job, J.D. writing is easy to read, and easy to apply in your daily life. [...]

If you really get after it, and cut way back to make as much money as possible available to paying off loans, it won’t matter much which method you choose. Now if you think it will take you 10 years, go with the highest interest model.

[...] Now he runs a personal finance empire. He takes a lot of criticism for his support of the Debt Snowball, which he describes in detail here, but the thing is: his methods work. If you are struggling with [...]

I find it interesting that people will knock Ramsey’s debt snowball method. IT WORKS! And it has worked for thousands of people (including me). Like others before me have said, it a psychological thing more than practical. But human nature makes it MORE practical than the other method.

It’s really the “snowball” mentality that makes it work. When you pay off that first “small” debt and then add that money to the minimum you were paying on the SECOND debt plus all the extra you can find it gets you excited about REALLY getting out of debt! In my case, I paid almost $2k on my second debt the first month! Now THAT’S TRACTION!..

[...] Snowball Your Debt. If you have different debts, order them from the smallest to largest and pay them off in the order. Psychologically, you will feel better about eliminating those small debts and financially you will be more stable in order to pay the largest debt (such as school.) (More about debt snowballs here) [...]

The reason the debt snowball based on balances works better than interest rates is because you pay your balances with money not interest rate. You would be better off paying a higher interest rate on a 15 year mortgage than a lower rate on a 30 year. Interest rates are tactics used to get us into debt. That is why debt “con”solidation is not always the best choice. Two questions you should ask before getting financing are, 1. When will I finish paying for this? and 2. How much will it cost me? The interest rate is often used as a distraction.

[...] methods are great, but if you really want to free up cash, pay off a debt. I recommend using a debt snowball to tackle your obligations one after the other. But if your goal is to ease financial pressure [...]

I can attest to the snowball working like a charm. Since May 2003, my wife & I have paid off $85,000 in consumer debt (credit cards, car loans, student loans, etc) using the debt snowball prescribed here and specifically by Dave Ramsey. We are now debt free except the house and building our emergency fund. Even while doing the snowball, we managed to have a baby and pay close to $4,000 in medical expenses. It was a nice feeling knowing that we had CASH saved up to pay for the pregnancy expenses. My wife has also been able to quit her job as an admin. assistant and become a stay @ home mother. We do all of this on a very middle class salary. This method really works people….

[...] techniques people use when working toward large financial goals. I’m a huge proponent of the debt snowball, for example, because I’ve seen its power in my own life, and heard how successful others [...]

A quote from the article (from Sunday’s Washington Post):
Remember, the key to getting out of debt is to tackle the smallest debts first. It may seem more logical to go after the debt with the highest interest rate first. But you can get a nice psychological boost if you can pay off some small debts fast.

“I like the idea of paying the smaller bills first,” Tania Chandler said. “It gives you a sense of accomplishment sooner.”

[...] Dave Ramsey suggests that individuals should eliminate their debt by using what he calls the Debt Snowball. My understanding of the process is that he advocates, quite simply, for focusing on eliminating [...]

[...] by listing my debts in the order that I wanted to repay them. (This was before I knew about the debt snowball.) Next, I listed my expected sources of income. Finally, I brainstormed a possible plan of [...]

I understand the psychology behind the snowball, and why it works for most people – but what happens when none of your debts are “small”? If we implemented the snowball, we’d be paying the max on our smallest (and lowest-rate) debt for a year before it was paid off. And the next biggest one is twice as big. So where’s the motivation?

Anitra, I agree. Years ago, as I tried to find low interest rate cards, I found the low rate also had a low credit limit. I’d rather have had 10 cards offering a 10% rate but low limit, than the one card at 24% with a $10K limit. My focus then was 100% based on rates. $100 thrown at the 24% card made me feel better than getting rid of the 10% card with lower balance. I don’t understand the ‘feel good’ of the debt snowball.

Great article J.D. I was a bit upset the first time I heard of the debt snowball that someone hawking financial advice could propose something so flawed and illogical. But now I see the real power of the snowball,which is the psycological boost.

I’m glad to hear it worked out for you, congratulations on becoming debt free, and good luck with the transition to full time writing…

[...] in the office and tell whoever receives their call how much I owe them. I recently came across the Debt Snowball which I’m planning on practicing in order to start getting rid of my consumer [...]

Another approach that has worked for me, is to make a spreadsheet that keep track of all debts. It includes the balance, the interest paid (and some times charges). Each bedt has its own tab. Then by summing up all the fields on single sheet (The totals tab), I see the total reduction of debt (and lowering of interest paid each month). So you will see more results while still paying on the highest interest debt.

[...] might have just a little extra cash each month. Using the principles of the debt snowflake and the debt snowball, you can use this money to pay off your credit cards, your car loan, and other consumer debt. You [...]

A few months ago, I started a similar approach that Mike S mentioned. With it, I can see how much the *total* goes down every month, plus how much less I’m paying towards interest and conversely how much more is going towards the principal. It really is gratifying to watch all of the numbers go in the right directions. It’s especially nice when total owed goes down to the next lower thousand mark. Next month, it should go below the next lower ten-thousand mark!

It does happen that the account with the highest balance also has the highest APR though. The 2nd highest APR has the lowest balance, so I may work on that one for a while and then go back to the highest balance once it’s paid off. After that one, I would be hesitant to focus on all but the highest APR account as all of the others have much lower rates. Other than the psychological boost, is there any other reason to go the snowball route?

Recently, I’ve opened a couple new accounts with lower APRs and have done some balance transfers. My credit rating is in the fair range but rising. How long should I hold off before I apply for any more accounts and/or ask my current creditors for a reduction in my interest rates (although some have been gradually lowering on their own)? Is there a rule of thumb? Or should I wait until my credit score goes up a certain amount?

Advertiser Disclosure:
Many of the savings offers appearing on this site are from advertisers from which this website receives compensation for being listed here.
This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all deposit accounts available.

Disclaimer:All information provided on this site is for informational purposes only. GetRichSlowly.org makes no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions in this information or any damages arising from its display or use.